Performance Metrics Overview

Performance Metrics Types

Sharpe first proposed a ratio of excess return to total risk as an investment performance
metric. Subsequent work by Sharpe, Lintner, and Mossin extended these ideas to
entire asset markets in what is called the Capital Asset Pricing Model (CAPM). Since
the development of the CAPM, various investment performance metrics has
evolved.

This section presents four types of investment performance metrics:

The first type of metrics is absolute investment performance
metrics that are called “classic” metrics since they
are based on the CAPM. They include the Sharpe ratio, the information
ratio, and tracking error. To compute the Sharpe ratio from data,
use sharpe to calculate the
ratio for one or more asset return series. To compute the information
ratio and associated tracking error, use inforatio to
calculate these quantities for one or more asset return series.

The second type of metrics is relative investment
performance metrics to compute risk-adjusted returns. These metrics
are also based on the CAPM and include Beta, Jensen's Alpha, the Security
Market Line (SML), Modigliani and Modigliani Risk-Adjusted Return,
and the Graham-Harvey measures. To calculate risk-adjusted alpha
and return, use portalpha.

The third type of metrics is alternative investment
performance metrics based on lower partial moments. To calculate lower
partial moments, use lpm for
sample lower partial moments and elpm for
expected lower partial moments.

The fourth type of metrics is performance metrics based on maximum
drawdown and expected maximum drawdown. Drawdown
is the peak to trough decline during a specific record period of an
investment or fund. To calculate maximum or expected maximum drawdowns,
use maxdrawdown and
emaxdrawdown.